Corporate Governance And Shareholder Activism For Family-Owned Public Companies

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The 2018 battle between the Campbell Soup and Third Point Capital showed that even public companies with substantial family ownership are not immune to the most bruising, distracting and costly of the activist shareholder weapons: the proxy fight.

The 2018 battle between the Campbell Soup Company and Third Point Capital shows that even public companies with substantial family ownership (extended Dorrance family members own approximately 47% of the outstanding stock) are not immune to the most bruising, distracting and costly of the activist shareholder weapons: the proxy fight. These sorts of conflicts have all of the ingredients that make them irresistible fodder for splashy media coverage: household name companies, wealthy controlling families usually with prominent reputations in a particular locale and sometimes with members on opposite sides of the battle, and media savvy billionaire hedge fund managers often willing to use bareknuckle tactics to get what they want.

If any company going through an activist battle is lucky, it comes through the process stronger than it was going in, with clearer focus, better alignment with shareholders and perhaps with a new CEO and potentially a valuable new board member or two, and with some important lessons learned. Less fortunate companies end up distracted, disrupted and often for sale. The good news is that these outcomes are not random – there are lessons to be learned from the Campbell experience and other similar proxy contests. Better still, family-controlled companies have some unique advantages in this process. Here are four lessons that members of corporate boards – particularly of family-owned or controlled companies[1] — should consider when facing a Campbell-type activist situation:[2]

1. It’s easier to stay out of trouble than to get out of trouble.

While it seems obvious, the best defense against shareholder activism is to perform. Activists don’t take on companies that are doing well. Of course, no one aspires to underperform, and underperformance is usually the product of a variety of factors both internal (misplaced strategy, execution failure, lack of alignment on the board or management or both) and external (changing economic conditions or consumer dynamics, changing distribution, cost of raw materials, disruptive technology, regulation or competition). Sometimes these factors sneak up on you quickly, but more often they build slowly.

Of course, hindsight is 20/20, which underscores the need to get out in front of your problems fast. In the modern business environment with potentially instantaneous media coverage of any shortcomings or missteps, companies cannot be afraid to admit mistakes and make changes rapidly. This includes making changes to management and even to the board if necessary when things falter. These are big, difficult decisions in any organization, and can be particularly hard in family-controlled companies that often have a deserved reputation for a congenial culture. While that culture is valuable in many contexts, it cannot be allowed to excuse execution failures or tolerate underperformance. The key lesson is that if things are failing, make uncomfortable decisions quickly.

This doesn’t mean, however, that as soon as there is some public criticism that a board should make immediate change. One of the major strengths of a family-controlled company is the ability to resist the wrong kinds of public pressure: the short-term negative press or sentiment that sometimes accompanies taking the correct long-term steps to build real value. Against that backdrop it is crucial to remember that if you have board members who are overly concerned with public perception – perhaps because it may affect their ability to get seats on other boards – it will often lead to bad decisions in overseeing the company, and in particular will be debilitating in fighting any eventual activist fight.

The need for speed in addressing performance problems reinforces that a good board needs to be nimble: It should not be too big. One recent study indicates that decision-making groups bigger than 7 members decrease their effectiveness by 10% with each additional member over 7[3]. While the right number may not be scientifically provable, it is fair to say that conversations and decisions become more complicated when you have more than a dozen people involved.

A board also should not be too entrenched. While the institutional memory of a long-term board member is undoubtedly valuable, it needs to be weighed against the natural staleness that can result in having the same group of people addressing problems together for more than 7 or 8 years. You should be evaluating re-nomination annually in earnest and refreshing every couple of years with people holding diverse viewpoints and experiences who are courageous enough to state those views in the face of any prevailing tradition. This could be particularly important in a family-controlled company if that sense of tradition has migrated into an orthodoxy.

It is important to remember that adding just one new voice in a boardroom inherently changes the dynamic from what it was. This does not mean, however, that a boardroom should be a constantly changing and arguing battleground. Boards should seek stable, planned change. Boards should candidly, energetically and politely challenge one another, but absolutely need to be aligned after rigorous debate on key issues, most specifically on company strategy. Nothing will lead to institutional paralysis faster than a board that doesn’t agree on strategy.

Another key governance component of avoiding underperformance and allowing quick decision making is understanding the proper division of responsibility between the board and management. Boards that understand the so-called “noses in fingers out” standard and police themselves on their role as one of oversight, not execution will do this best. In addition to the potential liability issues that arise for board members from overstepping that line (that are beyond the scope of this article), it is rare that a group that meets four or six times a year would or should know enough to operate a business as quickly and effectively as those who deal with it every day. While it is not currently fashionable within the corporate governance advisory industry, one mechanism that presents strong benefits to a board in this manner is a combined Chairman and CEO role. This allows the board to have someone guiding it who actually is steeped in the day-to-day operations of the business and can ensure that the board exercises its oversight role without delving into operating decisions. A strong lead independent director can counterbalance very effectively any other risks of combining the role. Family-controlled companies may have more latitude to combine these roles and weather any associated criticism, and should seriously consider whether a combined Chair/CEO will serve their company best.

Whether combined with the Chairman role or not, the CEO obviously is central in a company’s performance and governance, which is precisely why CEO selection is such an essential responsibility of a good board. If the board is going to delegate such important responsibility to a CEO, the board really needs to understand the strengths and weaknesses of its CEO and management.  It is crucial for board members to remember that no one is perfect, including your company’s CEO. It therefore is critical in CEO appointment to recognize that the responsibility does not end once a candidate is hired. The board needs to ensure that they are empowering the CEO’s strengths while keeping an eye on and mitigating his or her weaknesses. Does your CEO have a style that is consensus oriented? Does this reflect an aversion to conflict which therefore may not hold people accountable quickly enough when they fail to deliver results? Or does the CEO have more of a command and control style that gets things done, but may risk surrounding him or herself with people who execute without questioning? Does the CEO recognize and take responsibility for mistakes? Does your CEO have strong strategic skills but need a COO, or have great execution skills but need a head of Strategy? No style is necessarily inherently bad, most of these styles can work well depending upon the mission facing the company, so long as the CEO is self-aware and surrounds him or herself with the right, complimentary team. And most importantly if the board keeps the strengths and weakness of that style in mind and makes sure it doesn’t become a problem for the company.

Assuming you have a nimble board in place, ready to make fast decisions if things really go wrong, and a CEO who you trust and understand to execute the agreed strategy, there is one more key enabler of an ability to rapidly respond when your company is having problems: Your ability to go see your large shareholders as soon as you can to credibly and persuasively let them know that you are taking the problems seriously. In order to be able to do that effectively, you cannot wait until you need your shareholders to go see them. This is particularly true for your family shareholders who are more likely to have a true long-term “owner” mentality – as compared to a shorter term “investor” mentality – that makes them particularly sympathetic to arguments against short-term activist gain arguments. Even if your shareholders are not insiders, no one likes to hear from you for the first time in a long time when you want something from them.

This is why you need an actively managed and regularized schedule for shareholder engagement. Your management team should be building a relationship of open dialogue and trust with them so that they know what is going on, and more importantly, what you are doing about it in a reasonable time frame. In this regard, the head of Investor Relations is particularly important role in your company, and one in which the board should have some insight. The person who runs IR for your Company needs to be an experienced, credible and articulate ambassador for the company on a daily basis. This is not a role to develop talent, it is a key role in corporate governance. Also key is that investor relations, particularly with family shareholders, is not just your head of IR’s job. The most effective organizations are ones where key investors know and trust the key leaders in the company: the Chairman, the CEO, and the CFO to name a few.  This requires regular and active work, but it is invaluable. If investor relations is done properly, you will already know where your large investors stand with a reasonable degree of certainty if you find yourself in the unfortunate circumstances of dealing with a hostile activist investor.

2. Hope is not a strategy—preparation is key.

Even the best boards may find themselves dealing with a period of significant underperformance that, if unchecked, can lead to an activist calling. If your company has underperformed and perhaps you have made some senior changes in management and maybe even at the board level, what do you do next?

First and foremost, forewarned is forearmed – the most important first step is to hire a talented stock monitoring service, often part of a proxy solicitation firm, to monitor activity in your stock and report to management at least weekly. The good ones combine science and art and can predict with remarkable accuracy who is buying into your stock and when.

Once you know that you have an activist invested in your stock there is a lot of work to do, so you’ll want to know as early as possible and you will need to get to know your new shareholder. It’s important to remember that not all activists are created equal. Activist investors have many different styles. Some have very private, firm but constructive approaches. They have a lot of resources and have studied your company intently – likely even more than you have. They may have great ideas and simply want a seat at the table to help add value, and they may be willing to become insiders and may truly add value to your board room.

At the other end of the spectrum, some activists have been highly successful mounting highly public, hostile media campaigns to publicly pressure and shame the board into making changes to management, strategy, or the board itself. You and your board will hear all of the difficult nature of the tactics to expect from your team of internal and external advisors (more about that in a minute), but no one – including you – will really appreciate or believe how uncomfortable it can get until it is actually happening.

Good outside corporate counsel and investment bankers should have extensive experience with most of the major activist shareholders and help answer your questions. Your questions should include: How has this activist conducted their position in the past? Is it a public embarrassment style or a behind the scenes style? Have they been known to seek board seats and if so, do they actually add value or are they disruptive? Have they brought proxy fights? Do they tend to settle those fights and if so on what terms? Do they agree to a standstill as part of a settlement and for how long? What motivates them? The answers to these key questions are central in developing your strategy as a board in how you will deal with the activist.

As part of your preparation, your board needs to decide early in the process how far it will go in trying to fight or settle a request by the activist for board representation with an understanding of the pros and cons of either approach. Your internal and external advisors should run through those pros and cons with you, and some of them are outlined below. Of course, there are things that may come up that might change your initial strategy, but you should expect that if the activist engagement gets ugly, your board and management may lose appetite for conflict particularly if your strategy is to fight. It is therefore particularly important that the board be aligned and have backbone on your agreed approach at the outset.

You will only be as strong as your weakest link and you do not want to abandon the correct approach to protect long term shareholder value because some board member or members later get cold feet. If you have some outliers on the Board at the outset, don’t be afraid to invite them to leave early, before the fight. That may feel like a very hard decision with the eye of public opinion watching the company’s every move, but it is important because once an activist engagement becomes a fight, everyone needs to be in the boat rowing in the same direction. In this regard, family-controlled companies again may have the advantage of being able to weather any criticism in making changes or in taking a firmer line, in particular if you know from the beginning that you may have a large or even decisive number of shareholder votes against the activist’s proposals going into any proxy season.

Once you have defined your optimal outcome, you should designate a primary point of contact with the activist, which ideally will be the CEO or Chair, depending upon the narrative that the activist is taking. If the activist is looking for a collaborative approach and the board agrees the activist may add value, your CEO is probably the best leader. If the activist is targeting the CEO, however, obviously it may be best to have the Chair as the point of contact. In addition, you need someone internally to lead the company’s efforts in dealing with the activist.  If it is clear that you are headed toward a proxy fight, well-prepared companies also will appoint a distinct leader in charge of the company’s defense effort who can dedicate virtually all of his or her time to the challenge, and who knows the board, the major shareholders and the Company. Keep in mind that this effort is incredibly time consuming, so your CEO and CFO will be essential players but will not be able to lead this effort and do their day jobs.

As discussed in more detail below, a proxy fight is a fast-moving, 24/7 public battle more akin to a political campaign than normal business activity, and as has been said there are two kinds of political campaigns: the quick and the dead. You need someone who is a combination campaign manager and field general, someone the board trusts to make decisions on the fly and someone with a good balance between knowing when to fight and when to negotiate. Empower that person to make decisions with the CEO and the Chair (or the Chair/CEO and lead independent director) as necessary. Keep the board informed, but do not plan to make every decision by a committee of the full board. You will not have time and the perfect answer is usually less important than speed.

Your internal leader needs to recognize that he or she can’t do this alone. They need to assemble the right team of internal and external talent. The internal team should be small enough to be nimble and to avoid distraction to the critical role that the rest of the company should be playing – which is to turn around the company’s performance. The core internal team naturally would include your CEO, CFO, general counsel, corporate secretary, investor relations lead, public relations/communications lead, along with key members of the board. Moreover, in some cases where the target of your activist’s campaign is CEO replacement, the board should evaluate the merits of that claim early. If CEO replacement is where the board is headed, you don’t want your CEO exercising too much influence on the conduct of the company’s defensive efforts, as he or she may naturally be inclined toward strategies and tactics that will spare their job. Indeed, you may be better off simply making that change before you start the fight.

Your board also needs to trust the company’s outside advisors, even though they are being retained by the company and not the board. A proxy contest will involve a large and expensive stable of corporate lawyers, public relations firms, governance experts, bankers, and proxy solicitors. You will learn quickly that there is a highly developed cottage industry of these professionals. They all know one another, recommend one another and at times the whole thing may feel a bit incestuous. But there is undeniable value in picking a team that has worked together before, particularly if they have worked together before against the very activist mounting your proxy fight. They have seen that activist’s tactics and moves before, and critically, they have negotiated with your opponent and know what it has taken to settle or resolve prior fights. This is all crucial intelligence that you will need in preparing for the coming contest and ultimately in resolving it on your terms.

Once you have your leader and your team, the team needs to prepare the company’s narrative early and test it. What happened? what went wrong? Why did the company underperform, and why were the board’s efforts along the way reasonable and timely? What is the board doing now to make change? Does there need to be further change to management or to the board? Why is the activist’s proposed solution a mistake, or are there parts of it that are a good idea that you can proactively and preemptively adopt? What are your greatest weaknesses and the activist’s strongest arguments and how will you respond to those? Is there a way to preempt those arguments before they are made to take some of the sting out of them? All of these are key to the narrative that you will need to start explaining to your shareholders – family, institutional and retail – if you are going to win this contest. Once you have the narrative, you need to craft different compelling versions of it for different audiences, including simple, pithy and clever visuals and copy that make your case simply and persuasively.

While your team is doing this work, you need to identify your best internal advocates who will speak to your institutional shareholders and proxy advisory firms like ISS, who will expect these to be from the Board, and in particular your Chair or lead independent director, the chair of your Governance Committee, and if you have family members on the board, probably a representative from the family. These people will be your primary advocates with your institutional shareholders and the proxy advisors so you need whoever will be the most credible and compelling. If you have key players who don’t meet that requirement, you probably need to consider whether they are in the right role. Once you have the board advocates you need to start rehearsing. The earlier and the more you can do it, the better it will be when and if you actually have to present to your larger shareholders. If you don’t have directors who can inspire your shareholders to vote for them, reconsider your directors.

3. Fasten your seatbelt, it’s going to be a bumpy ride.

Assume you are prepared: you’ve evaluated your activist, identified your strategy, chosen your leader, assembled your team and developed your narrative. If you are lucky you have had time to do that before things completely erupt publicly. What next? You need to get mentally ready for what will be an incredibly expensive, highly disruptive and at times extraordinarily frustrating few months.

You should re-read that last sentence.

You cannot overestimate how costly, time-consuming, distracting and unpleasant an activist fight can be. Unless you have been through one before, a proxy fight is likely to be far more bruising than you can imagine. And part of the challenge is that there is very little that you can do to mitigate most of that. A lot of it you just need to get your head around.

You should start by reading articles like Sheelah Kolhatkar’s excellent piece Paul Singer, Doomsday Investor in August 27, 2018’s New Yorker magazine to get a taste of the tactics that you might encounter in this process. At first you might find these descriptions implausible, but if you talk to companies that have been through the worst of proxy fights, they are not. If you are dealing with the public attack style of activist, you can expect professionally built attack websites, slickly-produced videos, and Twitter campaigns all challenging your fellow board members and your intelligence, competency and perhaps even ethics. You also could be named personally as a defendant in inventive litigation against the company and the board alleging that you have acted in a variety of untoward and legally actionable ways.

The activist might even engage private investigators to dig for personal dirt on your executives, your fellow directors or on you. Imagine people showing up at your home dressed as a landscaping crew and going through your trash. Imagine investigators calling your friends, your doctors, your children’s doctors looking for scandal, or even following you. This rapidly will feel beyond the bounds of decorum, if not the law. You justifiably will feel outraged and violated. You will ask your company’s lawyers if anything can be done as a legal matter to stop these things, and you will hear that while certain truly outrageous behavior might be actionable, most of it is within the law. Challenging the activist’s tactics that might cross the line will require you, as an individual, to stick your head up and go to court against the activist because the company may not have the legal standing to bring an harassment action. You will have to weigh whether taking this on publicly will make it stop or only heighten the public attention and make it worse. As you can imagine, you will be extremely frustrated. Sadly, it gets worse.

As uncomfortable as all of this is, keep in mind that it all is occurring publicly. The very goal of this kind of approach is to generate as much media coverage as possible to embarrass you, your fellow board members and management into making the changes that the activist is seeking. Therefore one difficult strategy to follow, but one that actually works, is to avoid reading most of the press coverage of the fight. If you have the right professional advisors, you should let them worry about and manage that. They should know which pieces are important enough to warrant your personal attention, and will reach out to you for fact correction and rebuttal information. Reading every article will only add to your daily level of frustration and distraction, while it is unlikely that you will have much to add in reading it that your team isn’t already handling.

If this all seems unfair, that’s because the unwritten rules of a proxy fight are not fair. An activist will be able to say and do things that a public company cannot do. You will be held to a higher standard by your institutional shareholders. They don’t want you to sink to that level of tactics, even if they work. You also will be more constrained by public disclosure rules. Indeed, some activists may mischaracterize to your other shareholders or the press what you are saying to them in private, knowing that you are constrained from correcting them selectively or publicly. For this reason it is particularly important to keep in mind that you can make important points public if you want to use them. This could include the status and details of any settlement offers that you have made to the activist, if the activist is claiming that you have been unresponsive.

You should not expect that arguments to ISS, Glass Lewis or your institutional shareholders based on the ethics of particular activist tactics, or the incentives created by shareholders ignoring those tactics in supporting a dissident will get much traction.  Proxy advisory services and many of your institutional shareholders won’t care how underhanded the activist may have been in its campaign in evaluating whether they recommend or vote for the activist slate. Remember your company is in this situation because it has underperformed, likely significantly. Your larger shareholders, particularly your institutional shareholders therefore are likely to be quite frustrated with management and the board. And you should expect to hear that frustration in candid terms on the campaign trail. Your team of board and management advocates should be well-prepared both to make their case on the merits, but more importantly to uncomfortably listen and actually be open to suggestions from your institutional shareholders.

While institutional shareholders used to be more skeptical of activist proxy fights, in recent years they have been more open to the view that there is value, or at least not harm, in adding a new voice or two to the board room to “shake things up.” See e.g. Shareholder Activism is on the Rise: Caution Required, Forbes, Yuliya, Ponomareva 12/10/18; Many will be even more encouraged to support the activist if ISS or Glass Lewis recommends supporting the dissident, which in 2018 was in 56% of cases for ISS and 44% for Glass Lewis.

Assuming that you can get your head around the challenges coming from the outside, you then need to manage the challenges that could come from within your own team. In particular, you should expect leaks of sensitive information at inopportune times.  When it happens, you will be astonished. Things known only by your hand-picked team and board will find their way into newspaper articles or TV broadcasts. “How does this happen?” you will quite reasonably ask yourself. Sadly, this is endemic to any exercise that involves this number of people. As Ben Franklin is to have said, three people can keep a secret if two of them are dead, and you cannot do this with just one person in the know.

That does not mean, however, that you shouldn’t try to minimize the leaks. First, read the riot act to everyone involved up front. Let everyone know that anyone found leaking information will be removed from their role, including management and board members. You might consider having everyone involved sign specific non-disclosure agreements – including management and board members. While all of these signatories almost certainly already have a legal obligation not to share confidential information, the very act of signing a separate document underscores that importance and can be remarkably effective in limiting casual slips of information.

Even after that, however, you should compartmentalize as much information as possible. Not everyone needs to know everything that is happening. Information should be shared on a truly need to know basis with your advisors, with senior employees, and even with the board. If you do have chronic leaks, you should conduct a leak investigation. One tool that is used in the intelligence community to uncover leaks is the concept of “eyewash” or the selective and intentional distribution of non-material, but incorrect information to individuals or groups that you think may be the source of a leak. If that information finds its way into the wrong hands, you have your leaker. People also need to be reminded of inadvertent disclosure. People should not be conducting key conversations while on cell phones, particularly in public or internationally. Key documents and computers need to be kept out of public spaces and locked at night. Confidentiality is an essential component of victory in this type of conflict, and it needs to be treated as such.

Of course, while all of this is going on, the company still has a business to run, one that is challenged and underperforming or you wouldn’t be in this situation in the first place. Some significant level of distraction is to be expected. Very few board members or management leaders will successfully follow the advice not to follow the press coverage of the fight. It will be the key subject of “water cooler” talk around the company, and in the board room. People reasonably will be concerned about the longer term implications of the activist strategy on the company and their jobs. Will the CEO or board get replaced? Will the company be put up for sale? Regularlized, direct communication to your employees – preferably in town hall-type settings with opportunity for questions and answers will help to manage this distraction, and may even provide a useful galvanizing opportunity to bring the company together against a common challenge. Nonetheless, expect the ironic consequence that the efforts of the activist allegedly to improve company performance will unavoidably distract from the core mission and negatively impact company performance to some degree until the conflict is resolved.

And if all of this weren’t enough, imagine what this army of advisors, shareholder communications and proxy fight is going to cost you. The Procter & Gamble proxy fight with Nelson Peltz cost the two sides combined in excess of $100 million, with P&G winning the vote and then placing Peltz on the board nonetheless. You should expect that a reasonable defense will cost your company millions of dollars, at a time when the company is already doing everything it can to bring back its performance. This is not a place to be pennywise and pound foolish, but your team should also be watching unnecessary expenditure. For example, there is an instinct to respond to every mailing piece that the activist sends out with one of your own. Mailing pieces are aimed at retail investors and earned media attention. With that in mind, you should know how much of your stock is held by retail investors and how many of them usually vote. If those numbers are low, activist mailings that do not garner significant attention in the press or are merely repetitive need not be answered tit-for-tat. Mailings are incredibly expensive and not always proportionately important.

4. Don’t be afraid to win.

In the end, after all of this planning, aggravation and effort the real question for the board comes down to whether to settle or fight. The first question you need to ask yourself honestly is whether the activist is right. Given all of the tactics, it may be difficult to separate emotion out of that evaluation. However, if your board or management does need fundamental change and there are internal barriers to making that change, it may be that you should be urging a settlement.

If upon reflection you truly believe that the activist does not add value, then fighting and winning, even by a narrow margin, allows you to retain control over who is in your boardroom and that is incredibly important. As already noted, even one new voice in a board room changes – sometimes dramatically – the nature of board interaction and decision making. If that voice has a clear view of strategy that is at odds with what the board has already studied and agreed in good faith is the right path forward, righting the ship and implementing that strategy will be much harder with a dissident vote in the room. Settling potentially brings into your boardroom a very different agenda and strategy, one that may be much more short-term focused. As already mentioned, a core lack of alignment in the boardroom is never good, and is potentially disastrous for a company trying to turn around underperformance.

But the value of keeping control of your board nomination process needs to be weighed against the extraordinary expense in time, money and distraction. Again, a fight likely will disrupt your efforts to improve business performance. Your institutional shareholders will hate a decision to fight, even if you are right, and may well vote against you. As already noted, they view activist fights, correctly, as expensive and distracting wastes of time. This could lead to a situation where your activist wins a majority of your non-family shareholders, creating an unhealthy and unhelpful dynamic and a potential drag on your stock. And even if you win, the activist may not go away and may continue the PR campaign or litigation against you.  At some point, for all of these reasons, your outside advisors likely will urge you to consider a compromise regardless of your view of the reasonableness of the activist’s demands.

You should listen carefully to that advice, the company has chosen these people for their expertise. But in asking questions and considering the advice you are getting, remember that your outside advisors are advisors. Don’t be afraid to push back on their advice. Even if they are highly experienced, they may not be as familiar with a situation where a controlling family can dictate a result, even if a majority of the non-family shareholders vote the other way. Another dynamic to keep in mind as you are evaluating settlement is that your outside advisors may have subconscious, competing incentives from your objectives. Your objective likely is never to have to deal with the activist again. Many of your advisors, however, make their living dealing with activists and so they inherently benefit from cultivating a slightly less adversarial relationship than may serve your company’s needs. I am not suggesting that most — if any — advisors have this as a conscious plan. In fact, the relationships of constructive communication are part of why you hired the advisor is the first place. It is important, however, to keep this potential unconscious bias in mind when weighing advice, as it is a fairly natural human dynamic to be reticent to play true hardball with someone you know you are going to have to deal with again.

Ultimately the compounding public assaults, aggravation and conflict, the demands of other shareholders, the counsel of your advisors and the closeness of daily tallies of proxies voted will lead to a weariness that prompts more frequent discussion of potential settlement. Some of your directors may fear that losing a majority of the non-family shareholders – even if you win the vote – will be delegitimizing. The Board will have likely heard strong pressure from institutional investors to settle and might even receive negative recommendations from the proxy advisor services. While it undeniably would be embarrassing to lose the majority of your non-family shareholder votes, remember that ultimately what it actually will be is a win. The board will continue to decide which voices will be most constructive in steering the company through its challenges.

There almost certainly will be negative press coverage of this close win, but it is debatable whether anyone really will pay the same amount of attention to your activist situation once the vote is over. What is less debatable is that the activist will have a lot less bargaining leverage once they have lost a proxy contest. You need to weigh the potential short-term embarrassment and institutional investor frustration of losing the majority of non-family shareholders votes against the bargaining advantage of winning the vote. If you can settle the matter on terms that you would accept without difficulty, there is value in settling. In contrast, if your activist is making a demand that you believe will be bad for the company, then the short-term embarrassment of a narrow win may be the better path.

If you choose to negotiate, treat it like any other negotiation. You should know your adversary and their negotiation style. Know your non-negotiables. As tempting as settlement may be, particularly if you have a high-profile and embarrassing public fight, don’t move too early. Early movement will likely be read as a sign of weakness and a lack of stomach for the fight and the terms of settlement will get more onerous. Also, if you know that you have a significant number of votes on your side, holding out as more votes come in daily increases your leverage in the negotiation. Through all of this, always keep in mind the disruption created by a CEO change or an activist director or directors on your Board and weigh that against the peace you are seeking. And that peace should be in writing. A good stand-still agreement will require the activist to foreswear a proxy fight the next year, restrict their ability to speak to directors, management and the press to pre-agreed terms, and spell out other reasonable terms that will make your relationship easier for some period of time while you right the ship.

As part of your settlement, you may agree to take additional new directors. You should vet those candidates as you would any other director, because once a settlement is signed they will be your directors. They will have fiduciary responsibilities that are the same as all of your other directors, and will not be spies or agents of your activist unless they are also employees of your activist. Indeed, after what will likely be an awkward first board meeting, you will soon find that you see no difference between them and your other directors, and they may go on to bring highly valuable skills and perspectives to your board.


The biggest learning from going through a proxy contest is that you don’t want to go through a proxy contest. The best way to avoid that is for your company to perform, and to act quickly when it does not perform. If, despite best efforts, you find yourself with an activist shareholder at your doors, prepare, get ready for the fight, and don’t be afraid to win. If you do all of those things, at the end of the process your company will be better for having gone through it.



[1] I use “family-controlled” going forward to include both actual control and companies where a family holding is significant even if not actually controlling for ease of reference.

[2] Nothing in this article should be construed as characterizing specific experiences in dealing with the Campbell Board or with Third Point Capital. The examples and lessons are based on my research and my experiences representing a number of companies.

[3] Decide and Deliver: 5 steps to Breakthrough Performance in Your Organization by Marcia Blenko, Michael C. Mankins, and Paul Rogers.

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